Nonresident Withholding and Tax Obligations: Congress Attempts to Simplify…Again

Employers with employees working out-of-state for varying lengths of time should be asking themselves: do we need to withhold income taxes for the duration the employee worked in the other state, even if it was for one day, and remit those taxes to the worksite state?

Do you know where your employees are working each day? This is a question we often ask our clients for purposes of assisting them with nexus issues. However, the answers to this question (if, in fact, the client can answer the question) raise even more complex issues – for both employer and employee – that are often overlooked. Specifically, employers with employees working out-of-state for varying lengths of time should be asking themselves: do we need to withhold income taxes for the duration the employee worked in the other state, even if it was for one day, and remit those taxes to the worksite state? In addition, for employees who have performed work out-of-state, tax season comes as a confusing time as well, as they struggle determine in which states they need to file nonresident income tax returns.

Unfortunately, states do not currently have a uniform bright-line rule to aid employers in determining at what point withholding income tax on a nonresident’s wages is required. Some states have a “first day, first dollar” rule, where employers are required to withhold taxes as soon as they send nonresident employees to the worksite state. For example, Colorado issued guidance last year stating that if an employee “performs services for more than a single day in Colorado, they are required to file and pay Colorado income tax, and the employer is required to withhold and remit Colorado income tax.” [1]

Other states determine an employer’s responsibility to withhold based on the number of days the employee worked in the state or the amount of wages earned in the state, or some combination of both. [2] However, even if two states use the same method to determine withholding responsibility, there may be different thresholds. For instance, both Oklahoma and Idaho use the dollar amount earned in the state as the state’s method, yet the threshold that creates a withholding responsibility is $300 during the calendar quarter and $1,000 during the calendar year, respectively. [3] New Mexico and Hawaii both use the number of days worked in the state to determine if withholding is required, but the threshold level for New Mexico to require withholding is an aggregate of 15 days out of the calendar year, while Hawaii’s is 61 days. [4] In addition to the different requirements, many of the states also have various exemptions or exclusions based on reciprocity agreements or employment types. For example, because of the reciprocity agreement between New Jersey and Pennsylvania, New Jersey does not require withholding on Pennsylvania residents who are working in the state, and vice versa. [5]

Recognizing that the imposition of various states’ income tax withholding rules poses a significant compliance burden on taxpayers, the Mobile Workforce State Income Tax Simplification Act of 2015 (the “Act”) was introduced by the 114th Congress in the Senate on Feb. 5, 2015. [6] Similar bills were introduced in prior years by the 113th Congress (H.R. 1129 and S. 1645) and the 112th Congress (H.R. 1864 and S. 3485), but were not enacted. The Act, if passed, would prohibit states from imposing income tax and would relieve employers from withholding income tax on wages or remuneration earned by an employee who performs employment duties in more than one state, unless the state is that of the employee’s residence or the employee was present and performing employment duties in the state for more than 30 days. This bright-line rule does not apply to certain public figures, such as professional athletes or entertainers.

An employee will be considered to be present and performing employment duties in a state for a day if he or she performs more of his or her employment duties within such state than in any other state. There are two caveats to this general rule. First, on any given day, if the employee performs employment duties only in the employee’s state of residence and one nonresident state, then the employee will be deemed to have performed more employment duties in the nonresident state, regardless of actual performing employment duties in each state. Second, transit time is not considered for purposes of determining the location where an employee performed employment duties. For example, if a resident of state A performs employment duties in state B for two hours, spends one hour in transit in state B, three hours of transit in state C and one hour performing employment duties in state C, then the employee will be viewed as present and performing employment duties in state B for such day. If, however, the employee is a resident of state B and all other facts remain the same, then the employee will be viewed as present and performing duties in state C for such day. To substantiate the days an employee works in a state, the Act requires employers to rely on the company’s time and attendance systems. If such record keeping systems do not exist, then employers may rely on the employees’ determination.

HA&W will continue to monitor the bills in both chambers and will report significant developments in future issues of this newsletter. We are ready to assist businesses that have questions about their employee withholding obligations.

Contact Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] Colorado GIL-14-015 (May 29, 2014). That guidance, which can be accessed here, also addressed sales and use tax and income tax nexus.

[2] For example, Georgia would not require withholding if (i) the nonresident employee works in Georgia for not more than 23 days during the calendar quarter, and (ii) remuneration for the services performed by the nonresident employee in the state does not exceed the lesser of 5 percent of the nonresident’s total income for performing services during the taxable year or $5,000. Ga. Code Ann. § 48-7-1(11) and Ga. Code Ann. § 48-7-100(10)(K).

[3] Ok. Stat § 68-2381.1(e)(4); Idaho Admin. Rules § 35.01.01.871(01)(b).

[4] NMSA 1978 § 7-3-3A.(1); Haw. Admin. Rules 18-235-61-04(b).

[5] For more information, see http://www.state.nj.us/treasury/taxation/njit25.shtml and https://revenue-pa.custhelp.com/app/answers/detail/a_id/851/~/what-is-a-reciprocal-agreement%3F.

[6] See S. 386, which can be accessed here, has been referred to the Committee on Finance. An identical bill was introduced in the House (H.R. 2351 – click here) on May 14, 2015, and was passed by the House Judiciary Committee on June 17.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.

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